The Hindu Business Line : Farm risk management — Solution in search of problems

AS MANY as 1100 farmers committed suicide. This is not about Andhra Pradesh or any part of India. These tragic suicides occurred in the most developed country in the world. Three states — South Carolina, North Carolina and Kentucky — in the US reported these farmer suicides just over a decade ago, in 1990-99. These states are known for commercial crops and the changes in market for the products led to serious economic and social consequences and ultimately to suicides by the farmers.

Farmer suicides continue unabated particularly in some parts India. The obvious suspect is the lender — private or public sector. Farm sector needs more and more money, but is not adequate condition to address the critical issues that lie unidentified, leave alone resolved. There is no doubt that distressed farmers need immediate relief but it is suicidal to pretend that this resolves the sector's problems.

Loss of production due to unfavourable weather, spurious seeds, pests, other biological process, and price crash etc., is leading to impoverishment and in some cases to suicides. It is difficult to slice and dice each suicide case in relation to each of the causes. But it is not difficult to discern the source of risk behind each of these cases.

A long-term solution is possible if only each of these risks is addressed. The difference between farmers in India and developed countries is not in the kind of risks but in risk management practices.

We compare and contrast production techniques and technology used by farmers in developed and our country, but not the framework of risk management and practices encouraged by the developed countries. Therein lies the difference and solution. The US's response to these problems was the enactment of the Agricultural Risk Protection Act (APRA) 2000. The Act aims to strengthen the safety net for agricultural producers by providing greater access to more affordable risk management tools and improved farm production and income and improve efficiency and integrity of federal crop insurance programmes.

Countries like Canada and Australia have introduced farm income stabilisation schemes.

Farm risks and management

An empirical study by Prof Meuwissen and Hardaker of the University of Holland and New England on risks identified by farmers and risk management strategies preferred by them broadly classifies the risks under business and finance category.

The main business risks in farming relate to price, production, personal, institutional, and technology. Can increased bank lending alone address these risks? Is that a solution to risk management challenges in these areas? The uncertainty is so much that the fortunes of farmers swing from bounty to bankruptcy. It is difficult to fathom that increased lending would mute the wide swings in farm income.

The financial risks relate to the change in interest rates, the changes in the exchange rate, and the ability to repay. Adequate identification of risks helps in mapping farmer specific risk profile, which marks the beginning of risk management. The study identified 12 risk management strategies. These risk management strategies can be again classified into two broad categories.

Strategies in which risks are shared with/transferred to others: These include buying price insurance, personal insurance, and price contracts for inputs/outputs, marketing contracts, use of financial derivatives. Strategies for on farm risk management include production at the lowest possible cost, off-farm employment, trade off between economies of scale and specialisation in crop production, self-insurance.

This survey also interestingly revealed that farmers' top risk management choice is buying insurance, both farm and personal. In developed countries farm insurance is at the heart of risk management strategies. For long these countries had assisted farmers by transferring price and income risks to public sector through commodity programmes — a la the FCI procurement and MSP practices.

In the subsequent phase they started shifting risks through subsidised farm insurance programmes. A quick look at the insurance schemes available to farmers in some of the developed countries such as the US.

Multiple peril insurance scheme: As the name implies, this scheme provides protection against losses from nearly all-natural disasters. It includes drought, excess moisture, cold and frost, wind, flood and unavoidable damage from insects and disease. Such policies begin at `catastrophic (cat) level'. There are varying levels of coverage.

The US federal government actively encourages farmers to buy this policy and heavily subsidises this. The policy can also be structured to defend losses as well as enhance profits. There is choice of farm- or area-specific trigger. The loss is determined at the market level prices. Loss determination and settlement are also easy compared to fragmented insurance products. It is a virtual one stop for protection against all natural disasters.

Farm revenue insurance: This provides protection against income loss due to financial risks. Do Indian farmers who are far more vulnerable deserve less? Pitted against MPIC the insurance cover available to Indian farmers is meagre. The triggers are heavy and loss coverage is also meagre. It just covers a few and not all production risks. Less said about the price risks the better.

Use of derivatives: Derivatives are popular tools to hedge price risk. To give small farmers who otherwise cannot access derivatives, banks/insurance companies can play the role of aggregators, which can be underwritten by FCI, which in turn can hedge on back-to-back basis, either in national or international markets.

Banks would be happy to finance up front premiums as hedging reduces lending risk. FCI can also chip in out of savings with reduced burden of procurement operations. A part of the subsidies and the procurement including storage costs can be diverted to insurance subsidies.

Vertical integration: While industry clamours for incentives for agro-processing industries on stand-alone basis, the farmers seek out their own. This creates hurdles in building food continuum and value chain. There needs to be reciprocal relationship which can provide natural hedge to both industry and farming .

Re-employment of farm labour: China recognises that farm sector cannot be growth engine and is now encouraging migration of farm labour to other sectors. According to an estimate, 150 million farm labour can be re-employed without affecting farming efficiency. Can our logic be different? If it is politically correct for China why not for us? Another interesting development is the somersault of production responsibility system in developed countries including China.

Sustainable agriculture: Another buzzword doing the rounds in various countries and the main policy plank is promotion of sustainable agricultural practices — environmental health, economic profitability and social and economic equity.

It is sufficient to note a study points out that soil to reach its maximum level humification with a relatively low molecular weight fraction of humid acid, takes 4000 years. One can imagine the sinister consequences of environmental degradation.

Risk management and sustainable agriculture practices are the growth drivers of the future. These enhance the success of farm financing as well and promote accelerated investment. Risk management would bring down costs to farmers, government, FCI, banks and to the whole economy making it competitive.

Most of the developed countries where agriculture accounts for less than 10 per cent of GDP are busy in building a new architecture for agriculture to meet the challenges of 21st Century not excluding WTO obligation.

In fact these countries have no imperative to produce more to feed their dwindling domestic population. If they are doing it, why not we?

(The author is General Manager, Risk Management, Syndicate Bank. He can be contacted at bsmurthy@Syndicatebank.net)

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